Mexico Taps Post-Lehman Crisis Measure to Bolster Sagging Peso

Nov. 30 (Bloomberg) -- Mexican policy makers are reverting
to a measure they used during the 2008 financial crisis to stem
losses in Latin America’s most-battered currency.

Mexico’s currency exchange commission said the central
bank will auction $400 million daily of its reserves at a peso
exchange rate at least 2 percent weaker than the previous day’s
level, providing support for the currency.

The mechanism, which was last used 19 months ago to shore
up the exchange rate following the collapse of Lehman Brothers
Holdings Inc., is a “preventative” measure designed to provide
liquidity to the market during times of volatility, the
commission said in a statement.

The bank is “recognizing that there’s too much volatility
in the currency and doing something about it,” said Alejandro
Urbina, who oversees $800 million of assets at Silva Capital
Management in Chicago. “It makes the peso more attractive.”

The peso has lost 16 percent in the past six months, making
it the worst performing major Latin American currency. It surged
the most in three weeks yesterday after the bank published the
statement, climbing 1.5 percent to 13.8230 per U.S. dollar at
the close in Mexico City.

Investors will probably only participate in the auctions
when the peso weakens 2 percent or more in intraday trading, the
exchange commission said.

Auctions will take place daily from 9 a.m. to 9:05 a.m., 12
to 12:05 p.m. and 3 p.m. to 3:05 p.m. in Mexico City, the
central bank said in a separate statement on its website.

‘Less Volatility’

Gerardo Rodriguez, the country’s deputy finance minister,
said in an interview yesterday that the peso market should have
“less volatility going forward.” Participation in the program
is likely to be limited, he said.

The peso has weakened 2 percent or more during just four
sessions in the past month.

“It’s like a circuit breaker,” said Win Thin, chief
emerging market strategist at Brown Brothers Harriman & Co. in
New York, said in a phone interview. “The signal is that
they’re worried about a weaker currency, they’re worried about
disorderly movements.”

Mexico’s currency commission, which is made up of
representatives of the central bank and Finance Ministry, also
said it was suspending until further notice the sale of dollar
options. The bank had been buying as much as $600 million
through the options every month since March 2010 to bolster
reserves while assuring against capital outflows and curbing
gains by the peso.

Reserves

Mexico’s foreign currency reserves have climbed $26 billion
since the start of the year to $140 billion in the week ending
Nov. 25, central bank data shows.

When Agustin Carstens took the position of Mexico’s central
bank governor in Jan. 2010, he said his mandate was to promote a
“stable currency.” With less than a month on the job, he
announced a program to boost international reserves, which have
risen 54 percent since then.

Rafael Camarena, an economist at Banco Santander SA in
Mexico City, said policy makers may have planned the
announcement to head off additional volatility as euro-area
finance chiefs meet in Brussels. The central bank’s interest
rate decision on Dec. 2 may also contain signals of increased
concern over spillover from Europe’s debt crisis, he said.

While yesterday’s move will help stabilize the foreign
exchange market, “this doesn’t mean that the peso depreciation
will end,” said Sergio Martin, a Mexico City-based economist at
HSBC Holdings Plc.

‘Orderly Fluctuation’

“What we are going to see is a more orderly fluctuation,”
Martin said in a telephone interview.

The peso’s decline over the past six months is the second-worst performance against the dollar among 16 major currencies
tracked by Bloomberg after South Africa’s rand.

Mexico sold all of the 6.5 billion pesos of 28-day Cetes it
offered at auction yesterday, the central bank said on its
website. The government sold all of the 7.5 billion pesos of 91-day bills and all of the 8 billion pesos of 182-day Cetes, the
bank said.

The yield on Mexico’s benchmark peso-denominated bond due
in 2024 declined 14 basis points, or 0.14 percentage point, to
6.73 percent. The price for the security rose 1.37 centavo
yesterday to 128.35 centavos per peso.

Silva Capital’s Urbina predicted the peso would extend
yesterday’s gains on optimism about the auction policy.

“There are people who are just getting woken up to this,”
Urbina said. “Once people get finished digesting what’s going
on, it should be good for more of a rally.”